Cost of Goods sold
Cost of goods sold refers to the costs involved in making the goods or services that are being sold. It is basically the direct materials, direct labor, and direct expenses involved in making the products. These are easily traceable costs and can be easily identifiable from looking at the products. The other costs that cannot be easily traceable and cannot be linked to the product are not associated with being the cost of goods sold.
Statement of Cost of goods sold
|Particulars||Amount ($)||Amount ($)|
|Beginning inventory of supplies||X|
|+ Purchases (supplies)||X|
|+ Direct labor (salary, wages)||X|
|Cost of goods and services||XX|
|Cost of goods sold||XX|
It refers to the total amount of sales recognized for the reporting period before any deductions are made in order to arrive at gross profit. It indicates the capability of the company to make sales in order to generate a profit. When deductions are netted against gross revenue, the aggregate amount would be referred to as net revenue or net sales. When gross revenue is recorded, all income from a sale is accounted for on the income statement.
There is no consideration for any expenditures from any source. Gross revenue is popularly referred to as the top line while net revenue is popularly referred to as the bottom line. Gross revenue is used as a metric and provides a better view of the health of the organization and better comparison among the peer’s companies. Gross revenue is recognized as per revenue recognition concept accounting standards.
Cost of goods sold VS Expenses
The differences between cost of goods sold and expenses are given below:
|Basis of difference||Cost of goods sold||Gross revenue|
|Meaning||COGS refer to all the direct costs required in making the products or rendering services.||Gross revenue refers to the total goods and services rendered during the organization.|
|Production linked||COGS are directly linked to the production or manufacturing of any finished product.||When Profit margin and indirect costs are added to COGS, it becomes gross revenue. The gross revenue is the output of production process.|
|Subset of||COGS is subset of expenses.||COGS is subtracted from gross revenue to arrive at gross profit.|
|Disclosure in Financial Statement||COGS falls under debit side of income statement.||The credit side of income statement is generally the gross revenue before providing for any expenses.|
|Accounting standards||COGS are not defined under any accounting standards.||Revenue is recognized as per revenue recognition concept.|
|Examples||– Direct materials required for the production of goods and services|
– Labor tied to production.
|List of all the goods sold before any sales returns|
|Point of origin||When the goods are produced or manufactured, the cost related to goods sold happen.||When the goods are sold, gross revenue is recognized. Gross revenue is recognized after transfer of ownership which generally happens after completion of delivery of goods or rendering of services.|